FERC Directs PJM to Further Delay its 2019 Capacity Auction

On July 25, 2019, FERC issued an order directing PJM Interconnection, L.L.C. (“PJM”) “not to conduct the 2019 BRA” (Base Residual Auction) in August (“July 2019 Order”). The 2019 BRA, which will procure capacity for the 2022-2023 Delivery Year, was already delayed from May to August while FERC considered how to apply the PJM Minimum Offer Price Rule (“MOPR”) to resources which receive out-of-market support, including Zero Emissions Credits (“ZECs”) and Renewable Energy Credits (“RECs”). If the MOPR were applied to units receiving ZECs, RECs, or other out-of-market support, it is expected capacity market prices would be higher in some regions, and market revenues may be lower for some generators receiving ZECs or RECs or their off-takers.

According to the July 2019 Order, FERC delayed the BRA to provide for greater market certainty. Previously in June 2018, FERC found PJM’s tariff unjust, unreasonable, and unduly discriminatory due to price suppression from resources receiving out-of-market support (“June 2018 Order”) (see July 11, 2018 edition of the WER). FERC then ordered a paper hearing in which final testimony was submitted in November 2018. The testimony incudes PJM’s proposal for the method by which to expand applicability of the MOPR to units receiving RECs and ZECs and a mechanism by which load serving entities could remove load and bilaterally contracted capacity from PJM auctions. FERC has yet to issue an order on the merits of the paper hearing.

In its most recent order, FERC appears to be concerned that if PJM were to proceed with the 2019 BRA under rates, terms, and conditions FERC already found to be unjust, unreasonable, and unduly discriminatory, there would be a need to rerun the auction. Relatedly, FERC denied “PJM’s request to clarify that any replacement rate ultimately adopted in this proceeding operate prospectively and would not require PJM to rerun the August 2019 BRA.” FERC added that PJM cannot conduct its next annual capacity auction until the Commission provides guidance on required changes in how PJM should apply the MOPR or some other mechanism.

Commissioners Richard Glick and Cheryl LaFleur both dissented from the June 2018 Order finding PJM’s capacity market and MOPR were unjust, unreasonable, and unduly discriminatory. Of note, Commissioner LaFleur has announced she will step down from the Commission on August 31. Because FERC has not yet ordered substantive changes to PJM’s MOPR, there is a possibility that FERC is currently in a 2-2 deadlock amongst its current four commissioners and will issue an order shortly after Commissioner LaFleur leaves the Commission.

Commissioners LaFleur and Glick also issued separate concurrences to the July 2019 Order in which they criticized the Commission’s inaction on how PJM should proceed and reiterated their concerns from their respective dissents to the June 2018 Order. Meanwhile, Commissioner Barnard McNamee responded in a separate concurrence in the July 2019 Order, stating: “[t]o suggest the Commission is the source of the problems presently facing PJM is to ignore nearly a decade of proceedings attempting to address the interaction between competitive markets and out-of-market subsidies.”

Going forward, it is widely anticipated that FERC will provide PJM guidance on how to apply the MOPR to resources receiving state subsidies. In doing so, FERC may require PJM to make a compliance filing to implement tariff changes, after which parties will be able to comment on PJM’s filing. In addition, depending on the changes FERC orders PJM to make, PJM may require time to implement such changes. As a result, the overall process may still take a significant amount of time following the next Commission action. In the meantime, the schedule for the 2019 BRA for 2022-2023 remains uncertain.

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